Topics in International Trade

This research consists of three topics in international trade. The first involves developing vertical models of production and trade. These models where final products are created after going through a chain of production processes are of considerable interest. Not only does trade in intermediate goods constitute a substantial proportion of all trade, but such vertical production creates complementarities across sectors which cause coordination failures and multiple equilibria to exist in a natural way. It turns out that these models are useful for thinking about a variety of questions in trade and development, including the case for subsidization of what are called `leading sectors` and the determinants of the distribution of gains from trade. This work is related to the literature in the 1950's on unbalanced growth and to the more recent literature on complementarities, as well as to the literature on models of vertical production in trade. The second topic is concerned with trade liberalization, welfare, and market access. This topic focuses on the relationship between trade liberalization, welfare, and the volume of trade. The approach taken is to look at the linkages between markets and their implications for the effect of trade liberalization on welfare and trade volume. The effects of linkages between markets in which the possibility of losses from liberalization due to second best effects is better understood. For example, Lopez and Panagariya suggest the Concertina Rule, where the highest tariff is reduced first, would not apply to intermediate goods. The approach, taken here casts light, among other things, on the issue of when trade liberalization along the lines of the Concertina Rule, raise welfare. Second, a hitherto unsuspected link between welfare and trade volume is discovered which seems quite general. This suggests that under certain conditions, trade liberalization which raises welfare must reduce trade volume. In these circumstances, pressure to liberalize trade in order to raise imports is likely to be resisted as such a policy would necessarily reduce welfare. The third topic involves R&D and exchange rates: This topic focuses on the effect of the exchange rate on R&D expenditures chosen in an open economy. In his provocative book, Michael Porter speculates that economies with overvalued exchange rates are forced to compete by innovating rather than by using lower prices to compete in the market. Despite the intriguing case studies offered in the book, the forces at work behind the scene are not well understood in the literature.